Fuzzy Multicriteria Decision-Making for Evaluating Mutual Fund Strategies

Shin-Yun Wang and Cheng Few Lee

Chapter 22 in Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives:In 4 Volumes, 2024, pp 775-794 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Investors often need to evaluate the investment strategies according to their own subjective preferences in terms of numerical values based upon various criteria when making investment in mutual funds. This situation can be regarded as a fuzzy multiple criteria decision-making (MCDM) problem. The purpose of this study is to propose an alternative approach, fuzzy multiple criteria decision-making with fuzzy integral. This approach relaxes the independence assumption among criteria for the evaluation of the MCDM problems, which is oftentimes the basic assumption in applying a hierarchical system for evaluating the strategies of selecting the mutual funds investment style. We also employ triangular fuzzy numbers to represent the decision makers’ subjective preferences on the criteria, as well as for the criteria measurements to evaluate mutual funds investment style. To achieve this objective, first, we employ factor analysis to extract four independent common factors from those criteria. Second, we construct the evaluation frame using a hierarchical system composed of the above four common factors with 16 evaluation criteria and then derive the relative weights with respect to the considered criteria. Third, the synthetic utility value corresponding to each mutual fund’s investment style is aggregated by the fuzzy weights with fuzzy performance values. Finally, we compare with empirical data and find that the model of FMCDM predicts the rate of return very accurately in certain ranges of λ, hence the non-additive fuzzy integral technique is an effective method for evaluating mutual funds’ strategy.

Keywords: Financial Accounting; Financial Auditing; Mutual Funds; Hedge Funds; Asset Pricing; Options; Portfolio Analysis; Risk Management; Investment Analysis; Momentum Analysis; Behavior Analysis; Futures; Index Futures; CDCs; Financial Econometrics; Statistics; Financial Derivatives; Financial Accounting (search for similar items in EconPapers)
JEL-codes: G1 G11 G12 G3 M41 M42 (search for similar items in EconPapers)
Date: 2024
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